Mellon Bank, N.A. v. Dick Corp.

• Decision Date: 04 December 2003
• Docket Number: No. 03-2604.,03-2604.
• Citation: 351 F.3d 290
• Parties: MELLON BANK, N.A., as agent for 14 prepetition senior lenders of Qualitech Steel Corp., Plaintiff-Appellant, v. DICK CORPORATION and GE Supply Company, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 290

351 F.3d 290

MELLON BANK, N.A., as agent for 14 prepetition senior lenders of Qualitech Steel Corp., Plaintiff-Appellant, v. DICK CORPORATION and GE Supply Company, Defendants-Appellees.

No. 03-2604.

United States Court of Appeals, Seventh Circuit.

Submitted: October 20, 2003.¹

Decided: December 4, 2003.

Jennifer C. DeMarco (submitted), Chadbourne & Parke, New York, NY, for Appellant.

Martin J. Weis, Dilworth Paxson, Philadelphia, PA, Charleyne Gabriel, Kunz & Opperman, Indianapolis, IN, for Appellees.

Before BAUER, POSNER, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

Bankruptcy law entitles debtors' estates to recover preferential transfers, including payments on account of antecedent debts made during the 90 days before the commencement of the proceeding. 11 U.S.C. § 547(b). Preferences are recovered "for the benefit of the estate" (11 U.S.C. § 550(a)) and thus profit all creditors according to their statutory and contractual entitlements. We must decide whether the right to recover a preference is an asset of the estate that may be assigned or distributed to a particular class of creditors to satisfy their entitlements. A different way to put the same question is whether a suit on behalf of all creditors in the money is "for the benefit of the estate". Either way the issue is characterized, our answer is "yes."

The dispute arises from a complex series of transactions that can be summed up simply. When Qualitech Steel entered bankruptcy, it was in economic distress — that is to say, it had a negative operating cash flow. (Financial distress, by contrast, entails a positive cash flow that is not large enough to retire existing debts.) Qualitech's equity was worthless. Secured debts exceeded the value of its assets. Most creditors, both secured and unsecured, agreed that the best step was to sell Qualitech promptly as a going concern to someone willing to take the risk of trying to turn the business around. In order to finance its operations for the time necessary to effect a sale — Qualitech was burning through cash at a monthly rate of $10 million — a syndicate of lenders advanced some additional capital. In order to mollify the prepetition secured creditors that did not want to participate, the bankruptcy judge promised them that, if their position deteriorated during the interim, they would be entitled to dibs on as much as $30 million of Qualitech's remaining assets, including the value of any preference-recovery actions. In re Qualitech Steel Corp., 276 F.3d 245 (7th Cir.2001), held over the protest of the unsecured creditors that this promise was within the bankruptcy judge's authority, and that the judge also properly found that the secured creditors' position had in fact deteriorated, entitling them to the first $30 million of any preference-recovery actions.

The sale price was insufficient to cover both the new super-priority loans and the original secured loans. The original secured lenders' unsatisfied debts exceeded the value of any anticipated preference recoveries. Because at this point the estate was penniless, a committee of the secured lenders advanced funds to finance preference actions through Mellon Bank, which was appointed as the creditors' agent to collect on behalf of the (dissolved) debtor in possession, Qualitech. Multiple preference-recovery actions have been filed; recoveries to date exceed $10 million. But Dick Corp. and GE Supply Co. contended that they need not return the roughly $1 million in last-minute payments they received. They advanced two principal arguments: first that the entitlement to pursue avoidance actions had been sold with Qualitech's business, and second that recoveries that would flow straight to the pockets of secured creditors are not "for the benefit of the estate" as § 550(a) uses that phrase. The bankruptcy judge agreed with both lines of argument and dismissed the actions. On an appeal under 28 U.S.C. § 158(a), the district judge rejected the first contention but accepted the second, and thus affirmed the judgment. 2003 U.S. Dist. LEXIS 9427 (S.D.Ind. May 9, 2003). We have jurisdiction of the creditors' appeal, because the order under review is the final decision in an adversary proceeding. 28 U.S.C. § 158(d).

Dick and GE (collectively the "preference recipients") ask us to affirm on the theory that the buyer of Qualitech's assets, rather than the secured creditors, owns any entitlement to recover preferential transfers. Although the district judge disagreed with this contention, and the preference recipients did not file a cross-appeal, litigants may offer on appeal any properly preserved argument that supports the judgment. See Massachusetts Mutual Insurance Co. v. Ludwig, 426 U.S. 479, 96 S.Ct. 2158, 48 L.Ed.2d 784 (1976). It is enough to say, however, that we agree with the district judge's treatment of this issue, for the reasons the judge gave.

Another potential show-stopper also requires little discussion. According to 11 U.S.C. § 547(b), a trustee or a debtor in possession may prosecute a preference-recovery action, and Mellon Bank is neither. See also Hartford Underwriters Insurance Co. v. Union Planters Bank, N.A., 530 U.S. 1, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000) (enforcing similar limitation in 11 U.S.C. § 506(c)). But Mellon Bank has stepped into the shoes of the dissolved Qualitech, acquiring the debtor's claim by means of the order we affirmed in Qualitech Steel. The Supreme Court's decision in Hartford Underwriters did not disturb decisions allowing a lineal descent of statutory rights. 530 U.S. at 13 n. 5, 120 S.Ct. 1942. Thus we need not determine whether creditors ever may pursue avoidance actions while a debtor in possession or trustee exists, and over their opposition, by a rationale along the lines of shareholders' derivative actions in corporate law. See In re Xonics Photochemical, Inc., 841 F.2d 198, 203 (7th Cir.1988). Cf. Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir.2003) (en banc).

Thus we arrive at the question whether a recovery for the use of secured creditors can be "for the benefit of the estate". We say "can be" rather than "is" because, by the time Mellon Bank filed the first...